Taxation: Finance Act 2020, Twenty-sixth Edition
By Alan Melville
Contents
Preface ix
Acknowledgements x
Summary of tax data xi
Part 1 Income Tax and National Insurance
1 Introduction to the UK tax system 3
UK taxes 3
Sources of tax law 4
The tax year 6
Structure of HM Revenue and Customs 6
Administration of the tax system 7
Self Assessment 7
Appeals 11
Tax evasion and avoidance 12
Making Tax Digital 14
The HMRC Charter 14
2 Introduction to income tax 16
Taxable persons 16
Classification of income 17
Exempt income 18
Structure of an income tax computation 19
Married couples and civil partners 20
Rates of income tax for 2020-21 20
Income taxed at source 23
Savings income 24
Dividend income 31
Allocation of the personal allowance 34
3 Personal allowances 38
Personal allowances for 2020-21 38
The personal allowance 39
Blind person’s allowance 42
Tax reducers 42
Married couple’s allowance 42
4 Payments and gifts eligible for tax relief 49
Payments and gifts deductible from
total income 49
Eligible interest payments 54
Annual payments 55
Gifts of shares or property to charity 55
Payments which are tax reducers 56
Loans used to purchase a life annuity 57
Gifts of pre-eminent property to
the nation 57
Gift Aid 58
5 Income from property 62
Definition of property income 62
Basis of assessment and allowable
expenditure 63
Capital expenditure 64
Losses 66
Lease premiums 67
“Rent-a-room” relief 69
Furnished holiday lettings (FHL) 69
6 Income from savings and investments 74
Interest received 74
Dividends received 76
Tax-efficient investments 76
Individual Savings Accounts 77
Enterprise Investment Scheme 79
Venture Capital Trusts 80
Child Trust Funds 81
Income from trusts and settlements 82
Miscellaneous income 85
7 Income from employment (1) 88
Employment and self-employment 88
Basis of assessment 91
Employment income 91
Non-taxable employment income 92
Deductible expenses 94
Termination payments 97
The PAYE system 99
Construction industry scheme 103
Employee incentive schemes 104
8 Income from employment (2) 109
Benefits in kind 109
Living accommodation 111
Cars provided for private use 114
Beneficial loans 118
Salary sacrifice 120
9 Income from self-employment:
Computation of income 122
The badges of trade 122
The calculation of trading profits 124
Deductibility of expenditure 125
Disallowed expenditure 125
Allowable expenditure 128
Adjustments relating to income 130
Trading income allowance 131
Cash basis and simplified expenses 132
10 Income from self-employment:
Basis periods 138
The current year basis 138
Commencement of trade 139
Cessation of trade 142
Change of accounting date 144
Averaging of trading profits for
farmers and creative artists 149
11 Income from self-employment:
Capital allowances 155
Eligible expenditure 155
Chargeable periods 155
Plant and machinery 156
Capital allowances on plant and
machinery 158
Writing down allowance 159
Annual investment allowance 162
First year allowance 165
Balancing allowances and charges 167
Non-pooled assets 167
Allowances on cessation of trade 171
Structures and buildings allowances
(SBAs) 172
Miscellaneous capital allowances 173
12 Income from self-employment:
Trading losses 178
Relief for trading losses 178
Carry-forward trade loss relief 179
Trade loss relief against total income 181
Early trade losses relief 184
Terminal trade loss relief 186
Post-cessation trade relief 188
Transfer of a business to a company 188
Losses on shares in unlisted trading
companies 188
Limit on income tax reliefs 189
13 Income from self-employment:
Partnerships 192
Principles of partnership taxation 192
Notional profits and losses 195
Change in partnership composition 196
Non-trading income 198
Trading losses 199
14 Pension contributions 204
Registered pension schemes 204
Tax relief for contributions
by scheme members 206
Tax relief for contributions
by employers 209
Annual allowance charge 211
Lifetime allowance charge 214
15 Payment of income tax, interest
and penalties 219
Payment of income tax 219
Late payment penalties 222
Interest on overdue income tax 223
Interest on overpaid income tax 224
Penalties 224
16 National Insurance contributions 229
Class 1 229
Class 1A 235
Class 1B 235
Class 2 236
Class 3 236
Class 4 237
Annual maximum contributions 238
Review questions (Set A) 242
Part 2 Capital Gains Tax
17 Introduction to capital gains tax 253
Chargeable persons 253
Chargeable assets 254
Chargeable disposals 255
Basis of assessment 256
Rates of CGT 257
Relief for capital losses 259
Relief for trading losses 261
Administration of CGT 263
18 Computation of gains and losses 267
Layout of a CGT computation 267
Disposal value 268
Allowable expenditure 268
Part disposals 270
Assets with negligible value 272
Assets held on 31 March 1982 273
19 Chattels and wasting assets 277
The chattels exemption 277
Chattels disposed of at a loss 279
Part disposals of chattels 279
Wasting chattels 282
Wasting assets 283
Leases 285
20 Shares and securities 294
The share matching rules 294
The Section 104 holding 296
Bonus issues 298
Rights issues 300
Capital distributions 302
Takeovers 304
Gilts and qualifying corporate bonds 306
21 Principal private residence 310
Principal private residence 310
Partial exemption 311
Deemed residence 312
Letting relief 314
Business use 316
22 CGT reliefs 319
Damaged assets 319
Destroyed assets 322
Replacement of business assets 323
Gift of business assets 326
Transfer of a business to a limited
company 328
Business asset disposal relief 329
Reinvestment into EIS shares 332
Loans to traders 333
Review questions (Set B) 336
Part 3 Corporation Tax
23 Introduction to corporation tax 343
Scope of corporation tax 343
Accounting periods 344
Taxable total profits 345
Trading income 346
Income from property 351
Income from non-trading loan
relationships 351
Dividends received 353
Relief for charitable donations 353
Loan relationships 354
Long periods of account 358
Research and development tax relief 360
Intangible fixed assets 361
24 Corporate chargeable gains 365
Chargeable disposals and chargeable
assets 365
Basis of assessment 366
Computation of gains and losses 366
Indexation allowance 367
Assets held on 31 March 1982 370
The rebasing election 373
Assets acquired before 6 April 1965 373
Disposals of shares or securities 374
25 Computation and payment of
the corporation tax liability 387
Corporation tax financial years 387
Rates of corporation tax 388
Due date of payment 389
Accounting for income tax deducted
at source 392
Shadow ACT 392
Self Assessment 393
Interest on underpaid and overpaid
corporation tax 394
Penalties 396
26 Corporation tax losses 400
Relief for trading losses 400
Carry forward of trade loss relief 401
Unrelieved qualifying charitable
donations 403
Trade loss relief against total profits 404
Repayments of corporation tax 408
Anti-avoidance legislation 409
Choice of loss relief 410
Non-trading losses 410
Restriction on deduction of
carried-forward losses 411
27 Close companies and investment
companies 414
Close companies 414
Definition of a close company 414
Exceptions 417
Consequences of close company
status 418
Companies with investment business 421
Choice of business medium 422
Incorporation 427
28 Groups of companies and
reconstructions 430
Related 51% group companies 430
Group payment arrangements 433
Transfer pricing 433
75% groups 434
Group relief 435
Transfer of chargeable assets within
a group 438
Capital losses 440
Consortia 441
Corporate interest restriction 443
Company reconstructions 443
Review questions (Set C) 446
Part 4 Miscellaneous
29 Value added tax (1) 455
The principle of VAT 455
Taxable persons 456
Taxable supplies 456
Exempt supplies 458
Reduced rate supplies 459
Zero rate supplies 459
The value of a supply 460
Imports and exports 462
Registration 465
Deregistration 470
30 Value added tax (2) 473
Accounting for VAT 473
The tax point 474
Tax invoices 474
Accounting records 475
Special schemes 476
Retail schemes 479
Bad debts 480
Non-deductible input tax 481
Partial exemption 483
Administration of VAT 485
Penalties, surcharges and interest 487
31 Inheritance tax 492
Transfers of value 492
Exempt transfers 494
Potentially exempt transfers (PETs) 496
IHT payable on chargeable lifetime
transfers 498
IHT payable on death 500
Valuation 506
Business property relief 508
Agricultural property relief 509
Administration of IHT 509
32 Overseas aspects of taxation 513
Residence and domicile 513
Income tax – general rules 516
Double taxation relief (DTR) 517
Income from employment 518
Trading income 520
Income from property and investments 521
Capital gains tax – general rules 521
Inheritance tax – general rules 522
Corporation tax – general rules 523
Controlled foreign companies 525
Transfer pricing 526
Double taxation relief for companies 526
Diverted profits tax 529
Digital services tax 530
Review questions (Set D) 533
Part 5 Answers
Answers to exercises 541
Answers to review questions 593
Index 605